Fed’s Position Amid Volatility in Financial Markets

The Federal Reserve stated that it is monitoring the volatility in financial markets and slowing overseas growth. However, it suggested that it would not rush to conclusions regarding the implications of these developments on its plans to again raise interest rates. The Fed’s first meeting of 2016 was overshadowed by the increasing turbulence in equities, combined with plunging commodity prices. Interest rates were left unchanged at 0.25 per cent.

When addressing the uncertain global outlook, the Fed said, “The committee is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook.” The central bank was in a difficult position; it needed to acknowledge the poor US data and market conditions without comprising its strategy to gradually lift interest rates.

Additionally, the Fed is particularly concerned about the absence of inflationary pressures, admitting that its policy committee would be perturbed if inflation ran persistently above or below its 2 per cent target. Fears of failing to reach this target are exacerbated by falling oil prices; these low prices coupled with a stronger dollar have triggered forecasts that inflation will take even longer to return to the Fed’s 2 per cent objective.

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